Angel investing is almost certainly not for you

byDylanonOctober 30, 2012

This is a difficult post for me to write. I think starting a company is one of the most valuable things that anyone can do. I’ve started a few and helped some other people do the same. But the suggestion by the Irish Times that older people should consider angel investing as a retirement activity is one of the dumbest things I’ve ever read.

“What’s the difference between me and you?/About five bank accounts, three ounces and two vehicles”Xzibit, ‘What’s the difference?’

Angel investment is a critical part of any startup ecosystem. None of the tech success stories in Ireland (or anywhere else) would exist without it. Hell, Mark Suster‘s first company was angel-funded by an Irish pig farmer. But angel investing (like venture) is a high-risk business. Like lending-money-to-a-crack-head-risky. Yes, there are huge opportunities but in reality most companies fail. It’s not something which anyone even half-sane should advise normal retirees to invest in.

Here’s the reality:

1. Yes, you can make money from angel investments but you’ll almost certainly lose it. No, that’s not pessimism, that’s the mathematical reality. Ron Conway’s second fund produced an IRR of precisely 0%. And that was the fund which had a Google investment.

2. To actually be in with a chance of making a return, you need a portfolio. Data varies but at a minimum this should be 10-15 investments. So you need to be active and full-time.

3. A portfolio approach has zero relevance unless you have access to the very best dealflow. This is one of the reasons why Kevin Rose’s track record is so good-the very best come to him (he’s also extremely smart).

4. The very worst kind of angel investor is someone who’s doing it as a pet project. Unless you’ve built a company it’s unlikely you’ll comprehend just how insane the startup rollercoaster can be. The very last thing a founder needs is a panicky angel investor. Do not be that person. Startups, do not take that person.

I’m convinced that the only route to economic growth in Ireland (and many other countries) is in the creation of new equity through startups. Retirees should certainly look at opportunities in funds which invest in this sector. But encouraging a class of amateur investors to get directly involved is precisely the reason we’re in this mess. We weren’t all property developers and we’re certainly not all angel investors.